Need-to-know basis not good enough for investors

Fund managers fear that by seeking clarification they will end up in possession of price-sensitive information and be in danger of breaking the law, with a live example of this coming in relation to announcements by Fortescue and Mineral Resources.
Photo: Jessica Dale

Retail investors were reminded again this week that they remain at the bottom of the information food chain in Australian equity capital markets. Critically important information for investment ­decision making continues to go to certain privileged parties and not to the general market. This situation is leading to some bizarre outcomes.

One fund manager told Chanticleer that he will not seek information from companies that are unwilling to make disclosures about price-sensitive developments.

The fear is that by seeking clarification, the fund manager will end up in possession of price-sensitive information and be in danger of breaking the law. What is bizarre about this is that the disclosure sought is usually no more than what one would expect from the reasonable person.

A live example of this is in relation to announcements this week by
Fortescue Metals Group
(FMG) and
Mineral Resources
. That should actually say, a single announcement prepared by FMG and published by both companies.

Retail investors and the general market were left in the dark about what this transaction would mean for the earnings and ­balance sheet of Mineral Resources.

However, analysts at various investment banks appeared to be in general agreement about the fact that the price paid was about $300 million. This information was dis­seminated to the institutional and high net worth clients of those banks on the day of the announcement.

For example,
David Evans
at Morgan Stanley, was able to inform clients that removing the estimated 50 million tonnes a year in crushing capacity for Christmas Creek meant fiscal 2015 earnings would be reduced by about 20 per cent.

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The dealing desk at Bell Potter told clients that the Mineral Resources management “believe that the lost profitability from Christmas Creek will be replaced within 12 to 18 months with opportunities in crushing, mining and infrastructure development."

It is astonishing that a company doing a deal worth $300 million that potentially hits earnings by 20per cent should say nothing to the market.

The immediate policing of disclosure obligations falls to the Australian Securities Exchange. The Australian Securities and Invesments Commission washes it hands of this frontline job.

Disclosure breaches

It waits for the referrals from the ASX for continuous disclosure breaches.

Further evidence of the dismal bottom-of-the-food-chain position of retail investors comes from ASIC’s latest market supervision update. The update talks about a review into the increasing incidence of fund managers and hedge funds in Australia sending out surveys to broking analysts in a bid to gain an edge on their rivals.

ASIC was concerned the surveys could increase the potential for the improper use of analysts forecasts on Australian stocks.

A particular focus of the ASIC review was the actions of the world’s biggest fund manager, BlackRock, which used survey results as an integral part of the investment strategy of certain funds in Australia and overseas.

The BlackRock survey strategy was discontinued across the entire group last week following a settlement with the New York Attorney-General Eric Schneiderman. The settlement document said the surveys allowed BlackRock to obtain information from analysts that could reveal forthcoming revisions to their published views, according to The New York Times.

Getting first drop on the earnings revisions by analysts can be incredibly useful and financially advantageous. This is especially true when the analyst is influential and makes a big call.

BlackRock says its online analyst ­surveys were issued to sell-side research analysts and designed to enable the group to quantify publicly available information from tens of thousands of analyst research reports, so they could feed that data into the computer models used in the group’s investment ­process. It says that the survey used by ­BlackRock’s Scientific Active Equity group explicitly stated that it requested only information that sell-side research analysts had already disseminated publicly – and an ­analyst could not even take part in the survey without first clicking a button to confirm that answers would be based solely on ­public information.

Avoid appearance of impropriety

The data from these online surveys were one of more than 100 different factors that BlackRock put into the models to determine investment decisions.

Nevertheless, BlackRock decided to discontinue its use of surveys “to avoid even the appearance of any impropriety". In its report into the review of analyst ­surveys in Australia, ASIC did not name BlackRock or anyone else surveying analysts.

What is interesting about the ASIC review is that it was prompted by the concerns of large foreign investment banks. They were not comfortable with the information being sought through surveys.

Although, these banks maintained tight protocols around the release of information, including only releasing published information, they believed there was potential for improper use of the information.

It is quite obvious that retail investors don’t have a chance, when the biggest providers of brokerage commission are gaining information directly ahead of others.

It may well be only published information that is included in surveys, but getting it first can provide a significant advantage.

An increasing proportion of sharemarket trading is conducted through trading ­algorithims, where transactions are conducted in milliseconds.

ASIC’s
Greg Yanco
says the review of ­analyst surveys was in keeping with the ­regulator’s focus on particular themes in relation to market behaviour.

There are a number of positive outcomes from ASIC’s actions. Revised questions used in surveys that have continued are less likely to seek non-public information. Some major investment banks are publishing the results of surveys on their research portals.

ASIC has recommended that broking analysts check to ensure that no non-public information is disclosed, and consider ­publishing any survey responses for the ­benefit of all research clients.

Bega Cheese
chairman
Barry Irvine
looks like being the king-maker in the battle for
Warrnambool Cheese & Butter Factory
.

He will walk away with about $100 million, including $70 million in profit if he accepts either the
Saputo
takeover offer or the one from
Murray Goulburn
.

There is a growing belief among investment bankers that Irvine will accept the Saputo offer and in doing so trigger a ­cascade of acceptances from others.

Even Murray Goulburn itself would find it hard to hold out if Bega goes for the cash and gives Saputo enough stock to pass 50 per cent. Once Saputo has 50 per cent, Murray Goulburn would not be able to meet one of its key bid conditions.

That in turn means it would not be able to control the company and would have little reason to remain a shareholder.

Other shareholders would have an incentive to accept the bid including
Lion
, which owns 10 per cent and various hedge funds with 10 per cent to 15 per cent.

Irvine is holding out the prospect of selling to “an Asian buyer" but that would have to be at a price of $9.50 a share to be sensible.

The so-called cheese wars have been a bonanza for the bankers and lawyers involved. The lawyers, in particular, have been enjoying plenty of work because of the involvement of the Australian Competition Tribunal and the Takeovers Panel.

Warrnambool has admitted it will pay total bid response costs of $8.6 million. Chanticleer’s estimates for the other fees paid by Saputo, Lion, Murray Goulburn, Bega and
Fonterra
would take the total fees paid to more than $20 million.